Perfect competition exists when there are large number of buyers and producers (sellers) of a homogeneous product and the price of such a product is determined by the industry.
Image Source: greenbookblog.org
All producers sell the commodity at the price fixed by market forces and no one can change this price.
ADVERTISEMENTS:
According to Mrs. Joan Robinson, “Perfect competition prevails when demand for the output of each producer is perfectly elastic.”
Followings are the main features of perfectly competitive market are given below:
1. Large number of buyers and sellers:
The number of buyers and sellers (firms) is so large that no buyer or seller can influence the market price by him independent action.
The position of each buyer and seller in the market is just like a drop in the ocean. Every buyer or seller purchases or sell a very insignificant amount of the total output. Individual firm is a price taker and not price maker.
2. Homogeneous product:
The products of all the firms identical and buyers also accept the product of each firm homogeneous.
ADVERTISEMENTS:
Therefore, no firms can charge price higher than market price. Yes, firm can sell any amount at market price.
3. Free entry and exit of the firms:
There is no legal, economic, natural or social restriction on the entry of new firms into the industry.
ADVERTISEMENTS:
Old firms are free to leave the industry. If industry is making profits new firms can enter the market to earn profits. Similarly, if the industry suffers losses, some individual firm may quit the market.
4. Perfect knowledge of market buyers and salve have full knowledge of the market price:
Advertisement and selling techniques do not affect the buyers’ preferences.
5. One Price:
At a particular time only one price of the commodity prevails in the whole market. This price in determined by market supply and demand, i.e. by industry. A firm cannot sell even a single unit above this price.
6. Perfect mobility of factors:
Factors of production are perfectly mobile within different regions, industries and firm.
7. Absence of selling and transportation cost:
For the uniformity of price it is assumed that there is no transport cost to transport the product from one segment of the market to other parts of the market.
Since products of different firms are identical there is no expenditure on advertisement of the product.